Student Loans, Open Enrollment and a Lesson in Government Incentives and Expensive Unintended Consequences

Many taxpayer supported colleges practice open enrollment. That simply means anybody can enroll regardless of ability to do the work academically. In fact, not-for-credit remedial classes are numerous and heavily attended by newly enrolled 'students.'


The result is more butts in the seats and more money for the colleges and their administrators, of course. {NOTE: We won't comment on what that says about the K-12 outcomes herein, but that's another story for another time.}


But there's more to the story than more money for the colleges. There are the accompanying higher tuition charges by the colleges and the higher taxes paid by the taxpayers.


And all this "free and easy" stuff is being done for what often amounts to not much of an outcome academically. But there's more that's wrong going on here --- much more.


There are the "freely and universally available" financial implications of this "open" enrollment policy to consider as well. That's because anyone can "qualify" for a government granted/backed loan, which in turn puts more butts in the college seats (at least temporarily), which in turn provides more funds for colleges and their administrators. There's only one problem -- the loan comes due down the road and somebody has to pay --- enter the student, perhaps the family and certainly the taxpayers.


No, it's not the government and not the college or its staff that's on the hook. It's the borrowing student (and perhaps family members) and the taxpayers.


So students, beware (taxpayers too). Government is out to help you borrow money for an education that you may or may not receive, and that's the problem. It's yet one more example of the "We're from the government and we're here to help" growing way of American life. Now the colleges are in on the scam too.


Most of us remember clearly when ObamaCare became the law of the land a few years ago.


However, too few of us recall another historic piece of legislation that same year --- the government took over student loans in its ongoing quest to save the taxpayers money. But as usual, it hasn't worked out that way. Not even close, as a matter of fact.


Defining Delinquency Down is subtitled 'Government programs to reduce defaults are encouraging more debt' and has this to say about our government in action and its effect on our college students:


"ObamaCare may get most of the press, but don't forget the growing mess that is the Obama Administration's student-loan program. . . .

A new report by the Federal Reserve Bank of New York finds that as of the fourth quarter of 2012 only about 40% of student borrowers were paying down their loans. About 17% were delinquent, defined as 90 days past their due payment. Hard to believe, but this "measured delinquency rate" is higher than any other consumer debt product, even credit-card debt.

Yet it is only half of the "effective" delinquency rate. A whopping 14% of borrowers who were not officially delinquent had the same balance as the previous quarter and 30% saw their balances increase.

That's because borrowers who can't afford to pay down their loans can ask the government for a deferment or forbearance, which freezes their payments while interest continues to accrue. During a deferment, Uncle Sam pays the interest on subsidized loans. To qualify for either option, borrowers merely need to claim an economic hardship or return to school. Borrowers can postpone payments indefinitely by enrolling in college half-time—during which time they can take out even more loans. Borrowers can use the loans to pay for incidental living expenses.

Heavily indebted borrowers can also enroll in an income-based repayment plan, which caps monthly payments at 10% of their discretionary income—about $150 per month for someone earning $30,000 annually. The government then forgives the entire outstanding loan after 10 years of making these minimum payments while working for a nonprofit or the government. You have to wait 20 years if you work in the profit-making economy.

But as the New York Fed report notes, borrowers who participate in income-based repayment plans may "make only small payments, which are often insufficient to cover the accumulated interest." Thus their loan balances grow.

Student loan debt nearly tripled to $966 billion in 2012 from $364 billion in 2004, but not merely because more students are going to school and taking out bigger loans. The Fed report's major finding is that government programs intended to prevent defaults are actually causing many borrowers to rack up more debt. Yet these borrowers aren't included in the government's official default or delinquency rates.

This reduces the political pressure to rein in government student lending, even though on present trend taxpayers will have to absorb tens of billions in default losses. As with ObamaCare, Mr. Obama passes out the loan benefits to young voters now, but everyone pays the price later."

Summing Up

Student loan debts accumulate, as does interest on those loans.

And if the borrower goes to work for the government or a nonprofit agency, the loan is forgiven in half the time as it would be if the borrower went to work in the private sector.

Yes, you read that right. Government discourages students from working in the private sector, and that's the productive segment of society on which the government and many nonprofit entities depend on taxpayers to fund their payrolls, and activities.


Like student loans and colleges, for example.

It's crazy but it's also true.

In the end, the open enrolled, heavily borrowing and resulting 'uneducated' students probably won't be able to get good jobs anyway, so the bill just gets sent to the taxpayers.

Politics sucks.

That's my take.

Thanks. Bob.